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US: courts' deference to an arbitration award is not without limits

International Arbitration Newsletter

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29 SEP 2015By:

As a matter of public policy, United States courts strongly favor alternative dispute resolution and show great deference to awards made by arbitration tribunals. However, a recent ruling by the US District Court for the District of Colorado1 (in which DLA Piper acted for one of the parties) demonstrates that such deference does not require a court to confirm an award in the face of a failure to follow agreed procedures, nor does it outweigh notions of due process and fundamental fairness.

Background

In 2009, CEEG (Shanghai) Solar Science & Technology Co., Ltd. (CEEG), a Chinese company based in Shanghai that develops solar panel products, and Lumos Solar LLC, a Boulder, Colorado-based provider of high-value solar energy products, entered into a co-branding agreement. That agreement contained an arbitration clause and a choice of language provision requiring that all documents exchanged by the parties, including judicial notices, be provided in English. On May 17, 2010, Lumos and CEEG entered into the sales agreement at issue in this dispute. That agreement also included an arbitration clause but contained no choice of language provision. However, throughout the parties’ relationship, all communications (including those regarding the dispute) were in English.

A dispute arose regarding two shipments of solar modules that Lumos asserted to be defective and CEEG’s demand for payment for the same shipments. In April 2013, Lumos received a document written in Chinese with no English translation or any explanation. Lumos eventually learned that the document was a notice of arbitration; CEEG had instituted arbitration against Lumos under the rules of the China International Economic and Trade Arbitration Commission (CIETAC). Despite the choice of language provision in the co-branding agreement, CEEG’s knowledge that Lumos personnel were not fluent in Chinese, and the fact that all the dealings between the parties to that point had been in English, CEEG and its counsel did not request that the notice of the request for arbitration sent by CIETAC to Lumos be in English and did not notify Lumos that the request for arbitration had been filed.

Eventually, in response to an inquiry from Lumos regarding the status of settlement discussions, CEEG informed Lumos that CEEG had requested arbitration. However, CEEG still did not explain the Chinese document or reference any deadlines. By the time Lumos found a translator to explain the notice and retained counsel, time had expired for appointment of the arbitration tribunal.

The arbitration proceeded and in due course an award was made in favor of CEEG.

US court proceedings

CEEG filed a petition to recognize and enforce in Colorado the award obtained in the arbitration referred to above under the New York Convention. That treaty lists seven exclusive grounds on which recognition and enforcement of an arbitration award may be refused, each of which is directed toward process and policy-based concerns.

DLA Piper was retained to represent Lumos. In opposing the motion to confirm the award, Lumos argued that confirmation should be denied because:

Lumos did not receive proper notice of the arbitration proceedings

Lumos had been denied the opportunity to participate in the selection of the tribunal as contemplated by the arbitration clause and

the arbitration procedure was not in accordance with the agreement of the parties.

CEEG argued in response that it was not required to provide notice of the arbitration to Lumos in English because the contract sued upon did not contain a choice of language clause. CEEG also argued that CIETAC’s default rules designate Chinese as the appropriate language and that Lumos was not prejudiced because Lumos was granted a delay in the arbitration proceedings to allow it to prepare for, and it did participate in, the arbitration.

After reviewing the parties’ briefing and holding a hearing on the matter, Senior Judge Wiley Y. Daniel of the Colorado District Court granted the Lumos motion to dismiss. Judge Daniel found that because the overall governing contract contained a choice of language provision requiring all notices to be “drawn up in the English language” and the parties had always communicated in English, CEEG’s failure to provide notice of the arbitration to Lumos in English was contrary to the agreed procedures between the parties and resulted in Lumos being deprived of the opportunity to participate in selection of the arbitration panel. Therefore, Lumos “did not receive notice reasonably calculated to apprise it of the pendency of the arbitration and allow it a meaningful opportunity to be heard, as required to satisfy due process.” Accordingly, Judge Daniel held pursuant to Article V(1)(b) and (d) of the New York Convention that CEEG’s arbitration award could not be confirmed.2

The ruling by Judge Daniel demonstrates that the New York Convention does not require a court to rubber-stamp approval of an arbitration award. In particular, there are limits to the deference that US courts are required to give an international arbitration award and gamesmanship that deprives a party of the right meaningfully to participate in all phases of the arbitration process exceeds those limits.

Find out more about this ruling and its implications for your business by contacting the authors.